Energy giant Duke Energy Corp. announced Monday that it has entered into a definitive agreement to acquire Cincinnati, OH-based Cinergy Corp. for $9 billion in stock, creating a formidable utility company with 5.4 million natural gas and electric customers. Company officials also hinted the future might see Duke splitting off its natural gas assets and going forward as a pure electric play.

The new company, to retain the name Duke Energy Corp. will have approximately $27 billion in annual revenues and $1.9 billion in annual net income, and will — on a combined basis — own or operate approximately 54,000 MW of electric generation domestically and internationally (35,000 MW from Duke Energy, and 19,000 MW from Cinergy). It would provide a “profitable, sustainable merchant business” for Duke Energy’s generation business, Duke Energy North America (DENA), said Duke Energy Chairman Paul M. Anderson.

DENA has had sagging profits over the past years and Duke had been looking for a buyer or partner in the venture. While awaiting regulatory approval of the proposed merger, Duke Energy “[will] continue to look for options to grow DENA,” such as joint ventures and “other ways to position” the generation business, Anderson noted. The company is not going to be “sitting on its thumbs.”

In addition to aiding DENA, Duke Energy’s long generation capacity position in the Midwest will be available to help Cinergy’s short capacity position in the region, noted Cinergy Chairman James E. Rogers.

A “good portion” of the Duke Energy portfolio will not be affected by the proposed deal, including the company’s natural gas pipeline, field services and international operations, the Charlotte, NC-based integrated energy company said. The combined company will have assets totaling more than $70 billion, and a market capitalization of $36 billion.

The transaction was unanimously approved by both companies’ boards of directors. The transaction also will require the approval of the shareholders of both companies, as well as a number of approvals or reviews by federal and state energy authorities, including state regulators from North Carolina, South Carolina, Ohio, Kentucky and Indiana; the Federal Energy Regulatory Commission; the Nuclear Regulatory Commission; the Securities and Exchange Commission; and the Department of Justice.

Duke Energy officials expect the transaction to close in the summer of 2006. The company said it plans to file with all the state agencies by June 30.

Under the merger agreement, each common share of Cinergy will be converted into 1.56 shares of Duke Energy upon closing of the merger. Cinergy investors are expected to receive 13.4% above the $40.36/share that the company’s stock closed at on May 6. Duke Energy shareholders will own about 76% of the total 1.3 billion shares, while Cinergy shareholders will own approximately 24% or about 310 million shares of Duke Energy shares outstanding.

The proposed merger is expected to be accretive to earnings by about 10-15 cents/share over the 2006-07 Wall Street estimates, according to Duke Energy.

Upon completion of the transaction, Duke Energy’s Anderson will be the chairman of the board of the combined company. Cinergy’s Rogers will become president and CEO of the new company. The new board will include 10 members named by Duke Energy and five members named by Cinergy.

“I know a lot of you’ve been speculating on what type of transaction we might do next…I’m very happy to say — this is it,” Anderson said Monday during a briefing with investors on the planned merger. “We are bringing together two premiere franchise electric utility platforms,” noted Rogers.

The transaction will form a utility business with 3.7 million retail electric customers and 1.7 million retail gas customers in Ohio, Kentucky, Indiana, North Carolina, South Carolina and Ontario, Canada. The retail electric businesses will have more than 25,000 MW of generation capacity.

The combined company also will include Duke Energy’s major natural gas pipeline assets (Texas Eastern Transmission, Algonquin Gas Transmission, East Tennessee Natural Gas, BC Pipeline, Maritimes & Northeast and Gulfstream), along with storage assets, about 57,000 miles of natural gas gathering pipeline and processing facilities.

Anderson indicated Monday that the new company may split its gas and electric utility businesses in the future. “If they are separated, I would expect…the gas company would probably look to consolidate with other players in the gas industry…Duke Energy would be at that point a pure-play electric company with a fairly diverse set of assets in terms of fuel mix, in terms of geographic territory and in terms of regulatory environment. And I think that we would be in a very good position at that point to further consolidate [with the] electric industry,” he said.

Following the merger, the combined company will be a registered holding company with corporate headquarters in Charlotte, NC. The local headquarters of the operating utilities will remain unchanged by the merger: Cincinnati Gas & Electric and Union Light, Heat & Power will remain in Cincinnati; PSI Energy will stay in Plainfield, IN; and Duke Power will continue to be headquartered in Charlotte. Duke Energy Gas Transmission and certain commercial operations will remain in Houston, TX. Duke Energy Field Services will remain headquartered in Denver, CO, and Crescent Resources will continue to be located in Charlotte.

Duke Energy estimates the transaction will result in about $400 million in annual pre-tax savings by the third year from the elimination of duplicate spending and overlapping functions, improved sourcing strategies, avoidance of planned expenditures and the consolidation of non-regulated business unit operations. The combined companies currently employ about 29,350 workers, and are expected to see a reduction of approximately 1,500 employees, primarily through attrition, early retirements and other severance programs. Employees in the natural gas, nuclear and international operations won’t be affected by the reductions, according to Duke Energy.

Along with the merger announcement, Duke Energy’s board of directors said it intends to increase the company’s dividend by 12.7%, or 14 cents a year, for an annual dividend of $1.24. The dividend increase will be voted on during the board’s June meeting, and would be effective with the September disbursement, Duke Energy said.

©Copyright 2005Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.